Slovakia should reform to stay below debt ceiling, says OECD

By bne IntelliNews November 5, 2014

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Slovakia is at risk of exceeding a constitutional debt ceiling of 60% of gross domestic product (GDP), the Organisation for Economic Co-operation and Development (OECD) warned in a report released on November 5. Crossing the threshold would trigger a mandatory vote of confidence.

The warning could put more pressure on the centre-left government of Prime Minister Robert Fico to reduce the budget deficit. However, the OECD warns that may not be the best course at a time when the economy is just pushing towards more robust growth. 

"Government debt has risen sharply since the 2009 global crisis and is now running into constitutional debt ceilings," the OECD said in the latest economic survey of the country. "Indeed it is too high to allow automatic [budget] stabilisers to work."

According to the OECD's projections, gross government debt as a percentage of GDP will hit 60.2% next year, and rise to 60.9% in 2016. This year, debt is forecast to total 58.6%, though according to the less stringent Maastricht criteria the total will be 54.2%.

Under a constitutional amendment, the government should try to keep debt under 50% of GDP. However, a breach of the 60% threshold triggers a vote of confidence in the government. The debt brake limits are due to be gradually lowered by 10 percentage points between 2018-28. 

The OECD report recommends establishing binding multi-annual spending ceilings to reinforce budget discipline during economic upturns. However, it also commends Slovakia for the way it has brought down its budget deficit, while warning that further fiscal tightening may neither be easy nor desirable. 

"Strong fiscal consolidation contributed to confidence financial markets have in Slovakia. However, it has also undercut domestic drivers of growth, in particular as public investment spending has fallen and tax rates have risen," it said.

"Reducing the deficit further might prove challenging as the ongoing decline in public investment is not sustainable," it added. The budget deficit has been reduced from 8% of GDP in 2010 to 2.8% in 2013 and the OECD predicts it will decline further to 2.0% in 2016.

The Slovak economy belatedly rebounded at the end of 2013. The report forecasts that GDP growth will recover to 2.6% this year and gradually accelerate to 2.8% in 2015 and 3.4% in 2016.

Stronger growth will be necessary to reduce Slovakia's traditionally high unemployment rate and its big regional disparities. The sizeable slack in the economy was demonstrated by deflation at the end of 2013 and start of 2014. 

The OECD recommends structural reform of the public sector to reduce debt and give the government a greater chance of promoting growth. This includes measures such as improving administrative capacity, reducing corruption, higher property and environmental taxes, and improving revenue collection.

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